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In re Ebix, Inc. Stockholder Litigation

Court of Chancery of Delaware

July 17, 2018



          Joseph R. Slights III Vice Chancellor


         A. Defendant, Ebix, Inc. ("Ebix"), is a Delaware corporation headquartered in Atlanta, Georgia.[1] Ebix provides software and e-commerce services to insurance companies.[2]

         B. Ebix's board of directors (the "Board") comprises eight directors[3]: Robin Raina, Pavan Bhalla, Hans U. Keller, Hans U. Benz, Neil D. Eckert and Rolf Herter (collectively, the "Ebix Defendants") and Joseph R. Wright, Jr. and George W. Hebard III (the "Barington Defendants" and together with the Ebix Defendants, the "Director Defendants"). The Ebix Defendants joined the Board in or before 2005[4]; the Barington Defendants joined the Board in 2015 as designees of Ebix stockholder, Barington Capital Group, L.P. ("Barington").[5]

         C. Plaintiffs filed their initial class action complaint on May 6, 2013, in which they sought to enjoin a transaction between Ebix and affiliates of Goldman, Sachs & Co. When the merger discussions terminated, Plaintiffs abandoned their merger-related claims and shifted their focus to certain compensation and related agreements between Ebix and its CEO, Robin Raina, as well as other Ebix executives and directors. The operative complaint, the FAC, implicates the following conduct or agreements[6]:

         1. In 2009, Ebix entered into the Acquisition Bonus Agreement ("ABA") with Raina.[7] Ebix first disclosed the ABA to stockholders in its July 21, 2009 Form 8-K.[8] The ABA provided Raina the right to receive certain bonus payments upon an "Acquisition Event."[9] Per the July 21, 2009 disclosure, the independent Ebix directors "unanimously approved" the ABA on July 15, 2009, and the price of any grant to Raina under the ABA was to be determined from a "Base Price" of $23.84.[10]

         2. Since the adoption of the ABA, the Board has disclosed certain details about the ABA and its terms in Ebix's annual proxy statements. Relevant to the claims set forth in the FAC are the disclosures in Ebix's 2010 and 2016 Proxy Statements.

         (a) In the 2010 Proxy Statement, the Board disclosed "[i]n 2009 . . . the independent directors unanimously approved the Company's execution of and entry into the [ABA]."[11] It further disclosed that the Base Price for calculation of the ABA's bonus payment was $7.95, representing "the approximate price per share of the Company's common stock on March 25, 2009, when the independent members of the Board agreed on the desirability of this type of agreement."[12] In this same filing, the Board asked Ebix stockholders to approve a stock incentive plan (the "2010 Plan") allowing grants of equity compensation to certain Ebix directors and employees.[13]

         (b) In Ebix's 2016 Proxy Statement, the Board again disclosed, "[i]n 2009 . . . the independent directors unanimously approved the Company's execution of and entry into the [ABA]"[14] and that the $7.95 Base Price was the "approximate price per share of the Company's common stock on March 25, 2009 when the independent members of the Board agreed on the desirability of this type of agreement."[15] The Board also disclosed, as it had in prior proxy statements, [16] that the $7.95 ABA base price was the "post-stock split" price per share and that "prior to the three-for-one split that occurred on January 4, 2010, this value was $23.84."[17]In addition to the disclosures regarding the ABA, the 2016 Proxy Statement sought stockholder approval of the CEO Annual Incentive Bonus Plan (the "2016 CEO Bonus Plan") that would authorize the Board to grant additional bonus payments to Raina.[18]

         3. On December 19, 2014, the Board adopted certain amendments to Ebix's bylaws (the "2014 Bylaw Amendments") following Barington's expression of displeasure with the Board's performance and its stated desire to add directors to the Board.[19]

         D. On March 7, 2018, Defendants, Pavan Bhalla, Hans U. Keller, Hans U. Benz, Neil D. Eckert, Rolf Herter (collectively, the "Outside Directors"), the Barington Defendants and Ebix filed Motions for Summary Judgment, seeking judgment as a matter of law as to all then-extant counts of the FAC.[20]

          E. On March 8, 2018, Defendant, Raina, filed his Motion for Partial Summary Judgment (together with the Outside Directors' and Ebix's motions for summary judgment, the "Motions").[21]

         F. On April 10, 2018, Ebix and Raina entered into the Stock Appreciation Right Award Agreement (the "SAR Agreement"). The SAR Agreement replaces the ABA and, by its terms, terminates Ebix's and Raina's rights under the ABA.[22]

         G. On April 18, 2018, Plaintiffs filed an answering brief in opposition to Defendants' Motions.[23]

         H. On May 18, 2018, the Outside Directors, the Barington Defendants and Ebix filed their reply briefs in further support of their Motions and Raina filed his joinder in those briefs.[24] The Court heard oral argument on the Motions on May 23, 2018.

         NOW, THEREFORE, on this 17th day of July, 2018, it appears to the Court that:

         The ABA-Counts I, VI, VII and X

         1. It is well-settled that "when the substance of the dispute disappears due to the occurrence of certain events following the filing of an action, the matter is moot."[25]

         2. Counts I and VI challenge the adoption and the maintenance of the ABA. The only remedies sought in these counts are either injunctive or declaratory relief.[26]Specifically, both counts request a declaration that the ABA is invalid and void ab initio because, inter alia, it was adopted as an improper anti-takeover defense.[27]

         3. Ebix and Raina terminated the ABA on April 10, 2018. Thus, there is no relief available as to these two counts and no present controversy remains. [28]Accordingly, the Motions as to Counts I and VI are GRANTED.

         4. Counts VII and X allege breaches of fiduciary duty by the Director Defendants in connection with the ABA. Here again, the only remedy Plaintiffs seek is declaratory relief.[29]

         5. The claims for declaratory relief in Counts VII and X are also moot. To the extent Counts VII and X purport to state a claim for damages, the record does not support that claim. Plaintiffs allege that certain terms, which the Director Defendants have purported to add to the ABA (principally with respect to the Base Price), "deter[] potential bidders from making a premium offer in an acquisition."[30]They also allege that Raina has previously negotiated with bidders who ended the negotiations because they were unwilling to pay him the ABA bonus.[31] The FAC's allegations with regard to lost opportunities caused by the addition of terms to the ABA are unspecific, speculative and not supported by discovery.[32]

         6. The Motions as to Counts VII and X are GRANTED.

         The 2010 Proxy Disclosure and the 2010 Plan-Counts II and III

         7. Count II alleges the Ebix Defendants intentionally disclosed false information in Ebix's 2010 Proxy Statement to secure stockholder ratification of the 2010 Plan. Specifically, Plaintiffs allege that the Ebix Defendants misled stockholders regarding the substantial payments that might be due Raina under the ABA by disclosing two false facts about the ABA: (1) that the ABA's Base Price was set "on March 25, 2009 when the independent members of the Board agreed on the desirability of this type of agreement"; and (2) that the ABA's Base Price is $7.95-the market price of Ebix's stock on March 25, 2009.[33] The 2010 Proxy Statement also omitted the following material information about the ABA: (1) Ebix's stock price on July 15, 2009 (the date the 2010 Plan was actually approved)[34]; and (2) that certain unwritten terms were added to the ABA that were not included in the actual agreement-namely, that the Base Price could be adjusted by way of a stock split, repurchased shares would be included in the bonus calculation, Raina's cash bonus would be treated as shares for purposes of calculating the share base, "the size of the bonus and grossing-up under the [ABA]" and "the deductibility of the bonus and the tax effects and tax cost of the bonus."[35]

         8. In Ebix I, the Court found it reasonably conceivable that the 2010 Proxy Statement was materially misleading, explaining "it is reasonably conceivable that the difference in Base Price between $7.95 [the disclosed Base Price] and $23.84 [Ebix's actual market price on March 25, 2009] was material."[36]

         9. A disclosure claim that passes the reasonably conceivable threshold on a motion to dismiss can, of course, fail to survive a motion for summary judgment when evidence revealed in discovery demonstrates that the omission or disclosure was either not false or not, in fact, material. Here, however, no such evidence was discovered (or, at least, none was presented to the Court). The facts (as pled in the then-operative complaint) relied upon in Ebix I to find that the difference between the disclosed $7.95 Base Price and the actual $23.84 Base Price (as alleged) was material-namely, the 2010 proxy disclosures, the prior disclosures and the nature of, and relationship between, the ABA and the 2010 Plan-remain unchanged.[37]No new facts have been presented in the summary judgment record that would alter the materiality analysis with regard to that particular disclosure.[38]

         10. The Motions as to Count II are DENIED.

         11. The connection between Count II (the disclosure claims) and Count III (the claims relating to the 2010 Plan) is not terribly easy to follow. While Plaintiffs maintain (without support) that the Board was required to submit the 2010 Plan to the stockholders for approval, [39] that requirement does not exist in Delaware law.[40]Nevertheless, because Ebix's Board owed a duty to disclose fully and fairly all material information when it elected to seek stockholder approval of the 2010 Plan, the Court in Ebix I held that Plaintiffs had alleged sufficient facts to state a viable disclosure claim.[41] The Court also found, however, that the claim stated only a breach of the duty of care, not a breach of the duty of loyalty.[42] What remains of Count II, therefore, is a claim that the Ebix Defendants breached their duty of care in seeking stockholder approval of the 2010 Plan.

         12. Count III alleges the Director Defendants "breached their fiduciary duties by granting incentive compensation to themselves under the invalid 2010 Plan and incentive compensation to others under the invalid 2010 Plan . . . ."[43]

         13. I confess that I have struggled to discern exactly what claim Plaintiffs seek to prosecute in Count III, particularly given that only a duty of care claim has survived in Count II.[44] Plaintiffs argue that entire fairness applies to the grants of incentive compensation under "the invalid 2010 Plan" because the grants were self-interested transactions that were not ratified by a valid stockholder vote.[45] At oral argument, Plaintiffs explained that they are not challenging the amounts granted as somehow excessive or "not customary" on their face, but rather seek to prove that the awards "are not so customary when [defendants] know that the proxy statement that was used to solicit approval for that plan was not true. When [defendants] know, based on their knowledge, that the proxy statement that was used to solicit approval for that plan was no good, for them to say, 'Well, I got my 6, 000 shares. No harm, no foul' - that's the problem . . . . They can't do that."[46] As noted, however, in Ebix I, the Court determined that Plaintiffs had not well-pled a breach of the duty of loyalty with regard to the 2010 Proxy Statement and, in that regard, expressly held that Plaintiffs had not well-pled that the Outside Directors intentionally misled stockholders.[47]

         14. Given this procedural history, the only claim I can see that is left to try related to Count III is that, at some point following the adoption of the 2010 Plan, the Director Defendants became aware that the stockholder vote approving the 2010 Plan was uninformed but, nevertheless, continued to grant themselves awards under that Plan. Since Plaintiffs allege that all Director Defendants have received grants under the Plan in the years following its adoption, I understand Plaintiffs to challenge the validity of each of those grants.[48] In this respect, I understand Plaintiffs' argument to be that, similar to the scenario in Kahn v. Tremont Corp., the process here was so unfair, and the "price" was so intertwined with process, that the awards should be rescinded, or disgorgement should be ordered, even if the Court determines that the awards themselves fell within a range of reasonableness.[49] While it is unclear to me on this record whether this claim can be supported factually or legally, I am satisfied at this stage of the proceedings that it is desirable "to inquire [more] thoroughly into [the facts] in order to clarify the application of the law to the circumstances."[50] Accordingly, summary judgment as to Count III is DENIED.[51]

         15. Having parsed through the FAC, the parties' briefing and the transcript of the May 23 hearing on the Motions, I see the trial of Counts II and III playing out in one of two ways: (1) if Plaintiffs fail to prove that the alleged omitted or misleading disclosures were material, then the stockholder vote approving the 2010 Plan was informed, the Plan was ratified and the business judgment rule will be the applicable standard (given that Plaintiffs do not challenge the amounts of the awards)[52]; or (2) if Plaintiffs succeed in proving that the 2010 Proxy Statement was materially misleading or omitted material facts, then the stockholder vote will be deemed uninformed, the 2010 Plan was not ratified, entire fairness will be the standard of review with respect to the Director Defendants' self-interested compensation grants, and the Director Defendants will bear the burden of proving the fairness of the awards granted under the 2010 Plan.

         The 2014 Bylaw Amendments-Counts IV and V

         16. Count IV challenges the 2014 Bylaw Amendments as unreasonable anti-takeover devices adopted in breach of the Ebix Defendants' fiduciary duties.

         17. Generally, the business judgment presumption protects decisions by a board of directors as long as they can be "attributed to any rational business purpose." [53] "Enhanced judicial scrutiny under Unocal applies[, however, ] 'whenever the record reflects that a board of directors took defensive measures in response to a perceived threat to corporate policy and effectiveness which touches on issues of control.'"[54]

         18. In Ebix II, the Court denied a motion to dismiss Count IV and noted that the then-operative complaint stated that "Barington had 'announced a proxy contest'" and "characterize[d] Barington's actions-albeit in conclusory fashion- as amounting to a 'threat to [the Board's] control of Ebix.'"[55] The Court concluded, "[t]hese allegations, viewed in a light most favorable to Plaintiffs, permit a logical inference that Barington planned to win majority control of Ebix's Board by replacing incumbents with independent nominees."[56]

         19. Ebix II also determined that Unocal would apply to Count IV as pled because the complaint "permit[ted] the inference that the Bylaw Amendments were, in the aggregate, a forward-looking prophylactic designed with Barington in mind, but holstered until the period of Barington's guaranteed complacency expired."[57]The Court referenced three factors in support of its finding: (1) the 2014 Bylaw Amendments were prepared shortly after Barington's "intent to launch a proxy contest"; (2) Barington contractually was barred from running a slate of alternative directors for, at most, two years; and (3) while "most of the Bylaw Amendments achieved little more than making stockholder action more cumbersome," "the Special Meeting Bylaw's series of clauses [] allow[ed] the Board, at the very least, to delay stockholder-initiated special meetings for 120 days and, at most, prevent elections from occurring at special meetings indefinitely"-and "Bylaw amendments enacting shorter special meeting delay periods have received Unocal scrutiny in past cases."[58]

         20. The undisputed record now demonstrates: (1) Barington did not intend to launch a proxy contest but instead intended to add directors to the Board, which it achieved prior to the adoption of the 2014 Bylaw Amendments[59]; and (2) the Board did not adopt the 2014 Bylaw Amendments in response to any present or future threat by Barington.[60]

         21. The Ebix Defendants' decision to adopt the 2014 Bylaw Amendments is subject to the business judgment presumption, [61] and Plaintiffs have failed to rebut that presumption.[62] Summary judgment as to Count IV is GRANTED.

         22. Count V challenges the adoption of the 2014 Bylaw Amendments, claiming they were not approved by the Board because "there are no minutes of any meeting, no unanimous written consent or any other document evidencing Board approval of the [] Bylaws."[63]

         23. Under Section 8.5 of Ebix's bylaws, any bylaw "may be rescinded, altered, amended or repealed, and new Bylaws may be made [] by the Board, by vote of a majority of the number of directors then in office as directors, acting at any meeting of the Board."[64]

          24. Plaintiffs are correct that there are no official board minutes, no written consents or other contemporaneous official documents evidencing the Board's approval of the 2014 Bylaw Amendments.

         25. "[W]here corporate bylaws give the appearance on the records of the corporation as having been adopted by those with the authority to do so, where they are regularly maintained in the records of the corporation thereafter and where they are relied upon in dealings with others as being the bylaws of the corporation, there arises a rebuttable presumption that they were regularly and properly adopted."[65]"The party asserting that bylaws were not properly adopted bears the burden to prove it."[66]

         26. There is no dispute that the 2014 Bylaw Amendments were disclosed to stockholders as adopted in 2014 and that the Board has since treated them as Ebix's official bylaws. Beyond the absence of minutes or written consents, Plaintiffs have failed to prove that the 2014 Bylaw Amendments were not adopted by the Board. On the other hand, the record contains an email sent by Benz to himself on December 19, 2014 at 5:44 p.m., that attaches a picture of handwritten notes labelled "BOD call."[67] Those notes reflect that attorneys and certain directors participated in a teleconference on December 19, 2014, at 5:00 p.m. (11:00 a.m. EST), that four bylaws were presented during that call by way of a "Motion," and that those bylaws were unanimously approved (by those directors on the call).[68] This board call was planned by way of several email chains leading up to December 19.[69] One of those emails, an email sent by Raina to the Board on December 17, 2014, contains, inter alia, an attachment titled "Ebix-Bylaws-cumulative Redline.pdf."[70] In the text of the email, Raina reminded the directors of the board call scheduled for December 19.[71] In another email from Raina, sent on December 22, 2014 to Robert Kerris, Ebix's secretary, Raina states, "all this is now approved by the Board[;] 8-K is being filed by Skadden on the 23rd/24th."[72] The email again attaches the document titled "Ebix-Bylaws-cumulative Redline.pdf."[73] And Ebix's December 24, 2014 Form 8-K discloses that the Board approved the 2014 Bylaw Amendments on December 19, 2014.[74]

         27. None of the deposition testimony cited by Plaintiffs overcomes the presumption of validity in light of the clear evidence of adoption.[75] The testimony simply shows that, years after the "Board call," several directors do not recall the call or the approval of the 2014 Bylaw Amendments. Such failure to remember, however, does not "place in dispute" the approval of the 2014 Bylaw Amendments.[76]

         28. Summary judgment as to Count V is GRANTED.

         The 2016 Proxy Disclosures and the 2016 CEO Bonus Plan-Count IX

         29. Count IX alleges

Ebix and the [Director] Defendants issued [a] false and materially misleading and incomplete 2016 Proxy Statement that contained material misstatements regarding the ABA and Base Price, including that (i) it had been validly approved by the Board; (ii) the Base Price was $7.95; (iii) the so-called independent directors had agreed on the desirability of that type of agreement on March 25, 2009; and (iv) the calculation of the ABA payout to Raina upon an acquisition event having occurred on December 31, 2015 was false.[77]

         It further alleges the 2016 Proxy Statement failed to include an accurate description of the ABA's terms-including additional unwritten ...

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